Hints suggest a possible rise in stocks

KevinMarder

Kevin Marder is a guest columnist and a co-founder of MarketWatch. He is
principal of Marder Investment Advisors Corp. and a contributor to
The Gilmo
Report. Previously, he served as chief market strategist for Ladenburg Thalmann
Co. and developed institutional fixed-income risk management software for
Capital Management Sciences.

Shares improve as market participants discount a resolution of the fiscal crisis. This transpires amid a seasonally positive period for the market.

Technically, the last two sessions have been constructive in the Nasdaq. Tuesday saw a major accumulation day, the first since day one of this advance nearly four weeks ago. This had the effect of clearing a five-day trading range, as shown below. The trading range itself was considered a positive, as it came on three-straight days of dimming volume, a sign that the market was not being overrun by profit-takers.

Price then pulled back on Wednesday, but on volume 6% less than on Tuesday, a plus.

While institutions are still playing their cards close to their vest, subtle hints emerged in this week's action that suggest shares are closer to a substantial intermediate-term advance than a decline.

The intermediate-term speculator in high relative-strength names will do well to maintain a list of issues such as these that form basing patterns near their old price highs. In the event that institutions return to this market in a substantial manner, stocks such as these are likely to be among the next crop of leaders.

Almost always, growth stocks, or shares of recession-resistant companies with earnings growth of at least twice the historical average of 8%, are favored. The reason is that history's biggest-winning stocks have overwhelmingly come from the ranks of outfits showing earnings growth of at least 20% per annum.

Even so, on occasion, a cyclical group that has been out of favor for years can show material appreciation at a time when growth stocks are temporarily out of favor. At present, the builders are such a group at a time when only a few growth stocks have attempted breakouts. These, including Qihoo 360 Technology and Greenway Medical Technology, have failed.

At the time that the breakouts of Qihoo and Greenway failed, the message was that the market was not yet "ready." Greenway is less of a tell due to its average dollar volume being just $3.7 million, hardly representative of the institutional sentiment. This compares with Qihoo's $50.8 million.

It is conceivable that Qihoo's breakout, if it occurred earlier this week, may have succeeded. The fact that the majority of breakouts work in a healthy market illustrates the importance of general market analysis. The same chart patterns that are so rewarding when the water is warm can stop one out with small losses when the conditions are not right. Getting stopped out on one's entries four or five trades in a row is an indication that the market is not acting right for a successful campaign of speculation.

Among the names, Equinix
EQIX, -0.58%
was profiled in Tuesday's report. Shares of the network solutions provider on Tuesday rose on volume 103% above average. Seeing large participants step up to accumulate stock on the right side of a base corroborates the view that EQIX is a contender for a leadership role in the next market advance.

Then Wednesday saw volume cool to just 19% above average as the intraday range shrank compared with that of Tuesday. This is evidence of limited profit-taking following EQIX's 11% rise in the prior five days. At this point, an entry pivot of Sept. 28's high of 207.66 could be considered by a medium-term speculator. A standard stop-loss of 5%-7% could be used if proven incorrect.

LinkedIn
LNKD, -2.09%
has now moved to within about 10% of its high, as it has tacked on 19% in the last five weeks. The social networker grows at a torrid pace. In the September quarter, revenue expanded by 81% vs. the year-ago period. Technically, the stock has moved more than half of the way up the right side of its basing pattern. While an attractive entry is not yet present, LNKD should be monitored.

Interxion Holding
INXN, +0.50%
is interesting, not just because of its 27% and 24% estimates for '12 and '13, but also because it sets up along with two other members of its industry group, network solutions. Its pattern, along with those of Rackspace Solutions
RAX, -1.51%
and EQIX, points toward the group being a leader should the nearly-four-week-old advance in the averages develop into something sustainable.

Moreover, another group member, Akamai Technologies
AKAM, -1.19%
moved quickly up the right side of its base a week ago, bolting 10% on volume nearly triple its average. Akamai's estimates, at 16%/13%, are less interesting, but its confirmation of strength in the other three by poking to a 52-week high is encouraging.

Elsewhere, the leading builders, such as Ryland Group and Pulte Group, crept closer to their base tops on Wednesday. The iShares Silver Trust came to life Wednesday on the most active up day in three-and-a-half months, though it went out sloppily.

In summation, a few glamours dropped hints this week, extending the market's positive bias. While welcome, few leaders approach attractive entry points, leaving intermediate-term speculators in a high cash position.

At the time of this writing, of the stocks mentioned in this report, Kevin Marder or an affiliate thereof held no positions, though positions are subject to change at any time and without notice. The information contained herein may have been previously disseminated.

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